Are you looking for a way to multiply your money or better manage your finances? The concepts of saving and investing are two key elements to achieving financial stability and building long-term wealth. They both entail accumulating money to grow it for the future. However, despite their similarities, they also have distinctions that set them apart.
The difference between saving and investing mainly lies in the risk and potential returns. Savings are usually stored in bank accounts and have low risk and low returns. Governments also usually insure or back money in savings accounts up to a certain amount. As a result, the interest earned on savings is generally low and does not keep up with inflation.
On the other hand, investments generally involve a higher level of risk and have the potential for higher returns. It can include stocks, bonds, mutual funds, real estate, and other financial products. The value of investments can go up or down, but there is always the possibility of losing some or all of the money invested.
Choosing between saving and investing based on importance is subjective because every person’s goals, plans, and priorities differ. Although having a savings account comes with less risk, its profit margin is relatively low. In the long run, even with higher risk, investments still hold higher returns and more potential to grow wealth.
7 Ways to Turn Your Personal Savings Into Smart Investments
Consider investing if you have already saved some extra cash or are still planning to build up and multiply your savings. Making investments does not necessarily mean putting a large amount on stocks or buying shares—it can be many things.
You can start small, but ultimately, it depends on your goals and how much you have. Below are some essential factors, including strategies to apply to make smart investment decisions over time.
1. Know your risk tolerance
Before investing, you should identify your risk tolerance, which is how much you are willing to risk in an investment. Your risk tolerance can change over time, usually affected by your financial goals, age, and time horizon. For this reason, risk tolerance is different for everyone.
Knowing how much risk you are willing to accept is critical when deciding where to invest your money. If you do not know where your comfort zone lies, it would be best not to invest in anything.
Once you have figured out what kind of investor you are, you can better gauge how big you can invest. Hence, you will make smarter decisions aligned with your goals.
2. Set your goals
Another prerequisite in your investment plans is knowing your goals. Setting goals will steer you toward what you want to achieve. Knowing what you are saving for—whether a car, house, retirement, or business—will give you a guideline of how much money you will need, how long it will take, and what you must do to reach your goal.
Financial planning plays a significant role in saving and investing, with goal setting being a crucial part of it. At the same time, it affects your risk tolerance. Hence, it is important to figure out your goals and plans before acting upon them. Planning and goal setting can also help you determine how much money you would allocate for investments, as it differs for every person.
3. Research investment options
Once you have decided to invest your cash, it is time to research your options. The world of investments has vast options, so it is wise to familiarize yourself with them. Every investment performs and works differently. Some need more time to generate big returns, while others have a faster pace but only offer limited profits.
You can try the beginner-friendly investments below if you are starting with investing or have small personal savings.
- Index funds – Investment funds that look at the performance of a particular market index, such as the S&P 500. They are a good option for beginners because they offer broad market exposure and are relatively low-cost.
- Exchange-traded funds (ETFs) – Funds similar to index funds but can be bought and sold on an exchange like a stock. They also offer a low-cost way to gain broad market exposure.
- Mutual funds – Professionally managed investment funds that pool money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities. They offer a good option for beginners because they are diversified and professionally managed.
- Robo-advisors – Online investment management services that use algorithms to build and manage investment portfolios for clients. They are often low-cost and require very little investment knowledge.
You can explore these other options if you have a bigger budget allocated for your investments.
- Bonds – Debt securities that companies or governments issue. They generally offer lower returns than stocks but also come with lower risk.
- Real estate – When you invest in real estate, you can generate income through rental properties or long-term capital appreciation. It can be more illiquid, meaning it can take longer to sell a property if needed.
- Commodities – Investing in commodities such as gold, oil, or agricultural products can diversify your portfolio and help you profit from changes in commodity prices.
- Cryptocurrency – Digital currency can be volatile and high-risk, but it is a high-return investment.
- Business – Consider setting up a small business as it grants you better or direct control while having the potential for good revenue. At the same time, business ownership can give tax benefits, diversify your portfolio, and provide a sense of personal fulfilment and satisfaction.
4. Assess the fees and expenses
When you invest your savings, you pay fees and expenses that can reduce your investment returns. For example, mutual fund expense ratios (MERs) are annual fees that mutual funds charge for managing a portfolio for you.
They are usually higher than ETF expense ratios because mutual funds consist of multiple securities that an individual or team of portfolio managers holds.
Moreover, the cost of research, trading and other services adds up over time. On the other hand, exchange-traded fund (ETF) transaction fees are charged when buying or selling shares within an ETF. The website of all providers may not assess these. It would be best to check before making any purchases online.
5. Pay attention to tax implications
Each investment type has unique tax implications. For instance, individual stocks may be subject to capital gains taxes or dividend taxes depending on where you live and how long you own them before selling them.
Taxes are also different for different types of investments. Some investments pay taxable interest, while others do not produce any income until they mature, like a certificate of deposit.
You can comply with paying capital gains taxes on an investment if it is held in a retirement account such as an IRA or 401(k). Alternatively, some government bonds are taxed at maturity so that the issuer can claim their interest payments at year-end.
6. Seek professional help
Once you have decided on the type of investment you want, consider finding an investment planner to access further insights into asset allocation, investment selection, portfolio management, risk management, financial planning, and many others. Although you have done your research, it still helps to have a professional by your side.
7. Invest regularly and rebalance as needed
When you invest regularly, your investments grow steadily over time (as they should), and you will need to rebalance your portfolio every so often to maintain the right mix of stocks and bonds. Rebalancing means selling some of your best-performing stocks or bonds and using the money to buy more of whatever asset class has performed poorly over time.
From Savings to Investments
There are many money-making options in the market today. However, it is important to thoroughly research them before investing your money. In addition, remember that every investment functions at different levels and paces, making them long-term commitments.
As you consider an investment planner’s insights along with your goals and priorities when strategically managing your savings, you can generate a generous return on investment over time.
Katie is a part of the Client Experience team at Tencap Wealth Coaching, an independent investment advisory firm in Utah, United States. She is passionate about helping clients with their demands and concerns and ensures that each customer is set up for success by paying close attention to details in every pitch she works on. Outside work, Katie enjoys outdoor and adventurous activities, particularly hiking, pickleball, cycling, and spending time with her family.
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